What is the price of the widget under no liability

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Reference no: EM132200885

Question: Consumer A values consuming one unit of a widget at $900, while consumer B values consuming it at $600. There is a 3% chance of an accident from consuming the widget with damages equal to $4000. The firm's cost of production is $500 per unit. Assume that the firm is a perfect competitor and charges a price equal to marginal cost (including the expected value of any damages it would pay)

a) Is it efficient to produce and sell the widget to A? to B?

b) Now suppose that both consumers and the firm correctly perceive the accident risk. What is the price of the widget under no liability? Who buys the widget?

c) What is the price of the widget under strict liability? Who buys the widget?

d) Are the outcomes in (b) and (c) efficient?

e) Suppose instead that A has a 1% accident risk, while B has a 5% accident risk. The consumers know their own accident risks, but the firm perceives a 3% accident risk for all consumers. Damages in the event of an accident are $3000. What is the price under strict liability? Who buys the widget? Is this outcome efficient? Who would buy the good under no liability? Is this outcome efficient? Explain.

Reference no: EM132200885

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